How to grow from $30M to $1.4Bn enterprise value - From shipping clerk to PE-backed CEO - Ted Clark

Well, I'm a longtime business person. I started in 1973 as a shipping clerk working at a factory that made sealant and adhesives. Worked my way up over the next 20 years to become CEO of that company. Then as CEO, expanded it to the point where it was sold to PPG Industries. Shortly thereafter, I decided I wanted to try and do something different and developed a thesis to build a much larger adhesive and sealant company. Found a private equity backer to support me and did that for 14 years, and ultimately sold that company successfully to a public company called H.B. Fuller, traded on the New York Stock Exchange. Helped with the integration and ultimately stayed on as the Chief Operating Officer and ran the three global business units until I left about a year and a half ago to join Iron Path Capital as a partner. I've been at Iron Path since then.

What I wanted to try and do, which I think was a little bit different at the time, is I wanted to use the experience that I had and the knowledge that I had to build a business that was large enough that I wouldn't have to start trying to invest $250,000 and buy some small business and try and build it up. I wanted to match my capabilities with a business, and I wanted to do it on my own. I felt like the adhesives and sealants industry was fragmented enough where it was a really good opportunity to do a buy-and-build kind of strategy. So I spent about eight months really working on the thesis, and not just the thesis but really the business plan, right down to cataloging and evaluating all the potential acquisition candidates, defining what a platform company should look like, really trying to understand why this kind of a buildup would be successful. Looking at the capital-light nature of the industry, the consistent cash flows, the fact that a well-run adhesive company should grow about twice as fast as GDP because of the change from mechanical fasteners into adhesives. I put all that together into a pitch, a business plan and a pitch. I think we mailed that to about 12 different private equity firms at the time. I also had the help of a local buy-side banker here out in Southern California, his team helped pull us all together. Then I went out and pitched it, and surprisingly I got quite a bit of interest. So we pitched it including having the LLC agreement pulled together, all the monetary terms, what I was looking for, etc., and put it in a place where it could be diligenced. We knew we were going to be dealing with private equity firms; the pitch was not going to get the deal – they needed to be able to do some real diligence essentially on me and my experience and career to check out and challenge what I was saying about the fragmentation of the industry, the characteristics, etc. We had really three PE firms compete for the opportunity to back this. At the time I asked for support of about $100 million of equity; we thought that kind of equity could help us build a company of $350 million in sales and maybe $70-80 million in EBITDA. So that's how it all started. It's really fortunate. Found a really great firm in Quad C management. The importance of the buy-side support that I had at the time was actually to help me do my diligence on the private equity firms. Getting advice about very simple things like how old is the fund, has the team had experience in the same industry you've been in, have they had previous portfolio companies that invested in especially chemicals, etc. One area that maybe often gets overlooked is what kind of chemistry you have with the partners and the VPs and principals and associates at the firm, because you're really going to be working with them for three to five to seven years in a pretty intense way. So that was really important. I got good advice there. Ultimately selected Quad C management. The way I looked at this from the very beginning is I was not just an executive; I wanted to really be an investor-operator if you want to think about it that way. So I was just as interested in trying to really understand how private equity worked, what were the things they were looking at in terms of risk mitigation. Buy and builds are a big responsibility in the sense that they can get bogged down if something goes wrong. If you make your first two acquisitions and then something goes wrong, it stalls the progress and makes the PE group a little less bullish on the idea of putting more time, money, and capital into the program. So all those kinds of things – really trying to go into this with eyes wide open. Having a view that you've got to do two things with a buy and build: you've got to show that you can organically grow the things you're buying and you've got to show that you can improve them operationally while at the same time spending a lot of time looking at acquisition opportunities and how they might fit strategically. One other thing I would say is that I had a pretty careful view, but also one that was relatively easy to communicate. I just had a simple graph that said these are the markets that are really attractive for adhesives and sealants – a number of markets like aerospace, defense, automotive, certain construction markets – and here are the technologies that are really important on the other side. Initially I was really focused on North America, so I didn't have any geographic components beyond that at that point. Ultimately that did change. I tried to stay true to that; the discipline to really follow the strategy when you're executing it, because there are always shiny little bells and whistles that show up as you're looking at acquisition opportunities. We eliminated stuff that we could have talked ourselves into, but we really wanted to stay true to the strategy itself. So that's how it all started. It was a tough climb at the beginning because I was known in the industry but we hadn't actually done any deals. The real challenge is the acquisition of the platform company. One thing I can tell you is you define what the perfect platform company is, and then you very quickly realize that there are no companies like that. You have to get around the idea that you're going to look for maybe 70 or 80% of the characteristics you identified in your ideal platform company, and if you can get somewhere near that, you have to start. So we did that when we acquired Royal Adhesives in 2003, which was our platform company. At the time it was $35 million in sales and $5 million in EBITDA – much smaller than the platform company we were hoping to get, but a good platform company nonetheless. Nice facility, good labs, good team. Over the next five years we did five additional acquisitions, got to about $110 million in sales and $15 million in EBITDA, reached the point where it was time to create some liquidity for Quad C. Put the company on the market, and before we really got it out of the starting blocks we had the 2008 recession, the Great Recession. Like most companies, we had about a 30% reduction in sales the next year. So we just went to work – we looked at ways to do some consolidation, closed a plant, invested in our bigger plant in South Bend, and by the end of 2010 we had recovered completely from the recession. We were on track to do about $60 million of EBITDA and about $110 million in sales, but at much higher margins and profitability. Then we went through a process and recapitalized with Arsenal Capital, another really great firm with a lot of experience, especially in chemicals, and had a couple of operator partners like I'm doing now. I got to pick the first one; after that you don't have complete control over what happens as a CEO of a private equity-backed company – you have some influence but not complete control. But Arsenal was the one we wanted, the thing was close, and we all agreed to go with Arsenal. Had a great run with them for the next five years, grew the company from about $110 million to closer to $500 million, did another eight or nine acquisitions during that period, and grew EBITDA to about $125 million. Then had the opportunity to recapitalize again with a third PE firm, American Securities, a really great PE firm with a lot of experience in specialty chemicals and a newer fund. By that time we were supercharged with M&A; we were actually closing deals as we were closing the sale to American Securities, and did another four deals right after that. Within two and a half years, we were getting a lot of inbound interest from strategics, much larger adhesives and sealant companies, and we decided it would be the time to do that final kind of sale to a strategic buyer. In 2017 we did that – this little company that we started 14 years earlier and paid $30 million for, we sold to H.B. Fuller for just under $1.6 billion. By that time I was really invested in Royal and wanted to make sure the team and everybody was well placed, so I stayed on. I was asked to stay on by H.B. Fuller and help with the integration of Royal, which was a big deal – the largest acquisition in H.B. Fuller's history. We were about a third of the EBITDA; we increased their EBITDA by about a third. It was a big, important deal for the CEO Jim Owens at the time, and he wanted to make sure it all went well and asked me to stay, which I did for a period of time. Together we came to the view that there was an opportunity to do some additional restructuring. We reorganized the business from five business units – three regional and two market-based – to three global market-based operating units supporting about 30 global markets. I stayed on as COO and managed all that reorganization and led those three business units until everything was all stood up and in good shape. Then I retired. It's probably a little bit more than you wanted to hear, but that's sort of the history, and it's why I have such a passion for private equity. I say this a lot to people: I think private equity has helped democratize in many ways the ability for somebody who is really good at something but doesn't have a lot of their own money to partner with somebody to build something really great and interesting, and create wealth for themselves. It's hard work, but I can tell you I made more money in my private equity world than I did in the public company world I had before that and after. It's an industry I'm very passionate about.

I think you've got to be really intentional. That's not just intentional around the process of integration; it's more intentional around the idea of what is it you're really trying to build and what kind of culture are you creating to achieve that. In my case, going into it understanding it was a buy and build, and I had quite a bit of experience integrating previous acquisitions at the companies I'd worked at before. The idea was, again, that little matrix of the markets you want to be in, the technologies, and what kind of characteristics you want to have. I walked around all the time telling people: our company should be able to grow like twice GDP, so we need to figure out how to do that. Our gross margin should be in excess of 35%, meaning we're creating value beyond just some markup of the cost of manufacture. We should be shooting for EBITDA margins of 20%, suggesting we're getting the value and that we're a well-run company. And we should be striving to get working capital at about 15% or less of sales, suggesting we're well-operated – we collect our money, pay our bills, and manage inventory really well. I always tried to make it simple so that message could permeate down the organization. As you're evaluating acquisitions, you really need to put the time and effort in to determine what kind of cost synergies you're looking at, what growth synergies, and how you expect to get that. Then how do you integrate the acquired business into your culture? I always thought we tried to have this really open culture with very clear, simple approaches to what we were trying to accomplish. That transparency is great because it's very clear pretty quickly whether the people you acquire are going to buy into this approach. If they're not, you see it pretty quickly and can make changes early on. I always took the time to try and understand the history of the businesses we were acquiring. That's really important because at some point somebody actually understood how to make money in those businesses, and that core value-added activity was there. Many times it's still there, but often people forget why they make money in the first place. Spending a lot of time on really trying to understand that is key. We went through a process at American Securities called the Shared Vision process. When you're looking at a target, you're doing due diligence, looking at their materials and data, but you don't have unfettered access to management. Typically a banker is involved. After you close the deal, you have that unfettered access. American Securities would sit down with the management team and say, 'We're going to send you all our due diligence information – market reports, accounting reports, environmental reports – and we want you to take a look. We'll show you our thesis. You have a month to work through those materials, then we'll all meet and sit in a room for three days to determine our shared vision – do you agree with our thesis?' A lot of times you'd think they would, because you're pulling it out of them in management presentations, but it's not always as clear during the process given that you're negotiating a transaction. At Royal, probably not with as much process as American Securities, but we would have Gantt-chart organized integration plans ensuring every element of the company was involved and somebody was accountable for each function during the integration. I personally led most of the integrations until we got much larger. That's something I take as a best practice now. At Iron Path, we're careful to make sure after the deal closes we spend time with them on the strategy, the shared vision – is everybody on board and rowing in the same direction? Developing those relationships, trying to understand whether the culture that was there is the one we want going forward or needs adjustments. Doing those things up front is a real risk mitigator from an investment thesis point of view, because you don't find out six months later that everybody disagreed with the thesis you underwrote the investment on.

First, I guess everything I've learned about private equity I learned from most of these firms. It was my indoctrination into this world. There's a lot of things. Quad C originally were really known for very rigorous, complete due diligence. The level of analytical rigor you get from a PE firm compared to being an operating company is different because there's all kinds of other stuff going on in an operating company. That was a real eye-opener to me. I really grew to appreciate these smart people that come to work for PE firms, not because they're smart but because they work so hard. A lot of this stuff is really in the weeds, but being able to get into the weeds, get the data, and then telescope it to the big picture. That's a big thing I learned and tried to integrate at H.B. Fuller when I went back into the public company world. We upgraded our M&A process and revamped how we did diligence. A lot of big public companies go to third parties for a lot of stuff and might do a deal every once in a while. We wanted to be able to do deals as part of a growth strategy, organic and inorganic growth, with a stream of deals built around a strategy – kind of the Royal M&A approach – and integrated that into H.B. Fuller. It's not easy because people aren't trained the same way as in a PE firm. I learned a lot from the governance side. Sitting on PE boards, there's not as much governance-centric as a public company, but the principle is the same: you're there to offer help and advice, not run the company. You're there to support the CEO and the team. There's this coaching, creating clarity, not being afraid to get issues on the table but not providing the answers either – trying to coach to get the answers and continuing on the idea of a shared vision because things change. You may be doing great with your current strategy and then something like COVID or inflation happens. By the way, I was around with the inflation of the late 70s and 80s and started to recognize things that I thought were pretty clear, but most people in companies up until this latest round of inflation had never been involved in an inflationary economy. Salespeople with long careers never had to go out and increase prices due to inflationary pressures. These are the kinds of things you learn as part of PE board governance – to help people with context, ideas, and clarity. But in the end, management teams are the ones to make decisions and execute. Your job is to make sure they're capable of doing that. Another thing I've taken away: PE firms tend to be really great at staying focused on big issues, not under as much pressure as a public company for every quarter, but able to balance short-term versus medium- and long-term. Assuming things are going well and you're not running into issues with leverage and bank covenants – that changes dynamics. But PE firms also come in because their ability to understand how to work with debt providers. The other thing I really like about private equity is everybody's got skin in the game. In a board meeting, you're with people who invested essentially the same way as management and the limited partners. I think that makes governance clearer and more transparent.

After completing my career and becoming part of H.B. Fuller, before I left I was with some people at American Securities. One of them said, 'Geez, you had a really interesting career, you ought to write a book.' For some reason that stuck with me. I'd never done anything like it. I started in a very undisciplined way – I just thought I'd write down what I think happened and what was interesting. Along the journey, I started doing a lot of research. One issue that was really relevant to me was this ceiling being created in business between college graduates and high school graduates or people without a college degree. My story goes back almost half a century; it was a little bit different then. You could start at the bottom. While it would be very advantageous to have a degree, when I was finishing high school in the early days where everybody should go to college, I just didn't really want to. I started working in a factory and fell in love with manufacturing and operations and started to learn internally. I could tell that if I was doing a really good job, I'd get a chance to do another job. It's really more of a step function. I tried to always be friendly, meet people, ask questions, and I was young and curious. The book is really around the idea that you can learn in different ways. Some people learn better by doing than by studying and reading. That was the whole idea. The book hit a nerve with lots of people. I've gotten feedback that people have given it to their kids. A lot of kids are challenging the idea of whether to go to college. A lot of companies are challenging this idea. I read something in the Wall Street Journal this morning about companies now thinking about recruiting directly from high schools. Big companies are rethinking at what level they need a college degree. A lot of it comes from labor shortages, but I think it's something that's kind of overdue. At H.B. Fuller, we spent a lot of time developing programs to take people working in the plant and move them up into manager and supervisor positions. The company had driven the college degree requirement so low that you couldn't even be a supervisor without a degree, yet there were smart people in the factory who could easily do those jobs. They got frustrated because they brought in people from outside without hands-on experience. We turned it around and said, 'Let's identify those people and help train them to become managers and supervisors.' We called it Talent Up, identifying talent early and training them to go forward. The idea of the book is that you shouldn't think that because you don't have something, you still can't aspire to do something bigger than what you're currently doing. It was my path, and it was a really interesting path. It taught me how to network, how to find mentors – all these things that are so important in business. You need to know everything about your business; you can't know enough. It's about lifelong learning and being aspirational in your thinking. But I always try to temper that by saying at each step, be aspirational about something you can achieve. Don't say you want to be CEO; say you want to be the manager of the traffic department where you're currently a shipping clerk. Step by step is a good way to build your career. Not everybody is going to go all the way to the top, but people can rise to their level and shouldn't be arbitrarily cut off because of some educational standard that may or may not be applicable. Many educational standards are very applicable – you don't want a doctor who hasn't gone to medical school. But even 100 years ago, most lawyers didn't go to college; you would read the law with a lawyer. A lot of this stuff needs to be challenged more rigorously: why do we put in restrictions when we probably don't need to?

For probably the last 20 years, I read more history than anything else. I don't read as many business books as I did 30 years ago. Right now I'm reading a book by Walter Isaacson called 'The Codebreaker,' about gene editing and the science behind the practical implications of genetic stuff – how you can use certain things to cut and cleave molecules, all leading to things like the COVID vaccine. That's really interesting. Somebody gave me Elon Musk's book to read; I haven't started it yet. I do like podcasts. I walk every day and listen to podcasts. One I like right now is 'Business Wars' by Wondery. It's a high-level look at competition between companies like Southwest and American Airlines or Hilton and Marriott – really light listening and interesting stories. Many times, even before PE was a thing 80 or 90 years ago, people were using private capital to start these businesses. Another one is 'American Scandal,' which is interesting because you learn about leadership from the negative side – they talk about people who have done horrible things, but it tells you what not to do. They do a lot of episodes around businesses and government. That's a good one for me.

The easiest way is to go to tedclarkauthor.com. There's a little place there where you can send messages. Or [email protected]. Those are the two best ways.

My pleasure. Thank you for having me, Alex.